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November 19, 2008

Department of Flogging Deceased Equine Flesh

Some sensible talk on the auto bailout:

IF General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye. It won’t go overnight, but its demise will be virtually guaranteed.

Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course — the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.

I have several prescriptions for Detroit’s automakers.

First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.

That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota’s Avalon. Of course the Avalon feels like a better product — it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.

The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, “Getting more and more pay for less and less work is a dead-end street.”

You don’t have to look far for industries with unions that went down that road. Companies in the 21st century cannot perpetuate the destructive labor relations of the 20th. This will mean a new direction for the U.A.W., profit sharing or stock grants to all employees and a change in Big Three management culture.

The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms — all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.

Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options. Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies — especially fuel-saving designs — that may not arrive for years. Starving research and development is like eating the seed corn.

Just as important to the future of American carmakers is the sales force. When sales are down, you don’t want to lose the only people who can get them to grow. So don’t fire the best dealers, and don’t crush them with new financial or performance demands they can’t meet.

The test of whether a leader can run large organizations is whether he or she has successfully run large organizations in the past.

No sane company hires a CEO sight unseen with an unexamined or nonexistent performance record...except, of course, the American taxpayer.

It's like a jungle sometimes
It makes me wonder
How I keep from goin' under...

Posted by Cassandra at November 19, 2008 08:20 AM

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Okay, my thoughts as I begin my paper after readind Dead White Male Economists. Why couldn't the banking industry have restructured itself as well? Why can't we get rid of the Federal Reserve Act of 1913 that practically garuantees profts for the banking industry with fractional reserve lending? Why can't we boot out the criminals in Washington D.C. and put our government back on track?

*going back to my hearth*

Posted by: Cricket at November 19, 2008 09:15 AM

Well, Cricket, I think you have a different situation there.

The banking system underpins everything else - all commerce, all government, everything. You can't afford to let it go under because if money stops being available, the economy grinds to a halt and the dollar will collapse. Money has no "real" or objective value - its only worth what we think it's worth and if people lose confidence in it then its worth falls to nothing at all.

So you can't allow the banking system to fail, really.

We can't go back to barter as an economic system.

Plus, unlike the situation with the auto industry there really was nothing that inherently unsound in the banking system. The runs on most of these investment houses were caused by panic. The idea was to shore up confidence and stop the short selling. That was the problem that was driving even fairly solvent firms under and making banks leery of lending.

I think we do need banking reform, but you don't turn around an entire industry on a dime. It's too complex and it doesn't address the short term need.

Normally I would never have favored a bailout of this kind. There will be weird behavior and market fluctuations for a long time now, but eventually the market will right itself.

Posted by: Cassandra at November 19, 2008 09:45 AM

I'm waiting to hear from the NY Times and LA Times about how the nation MUST have a vibrant free press, so they need to be bailed out too. Frankly, I'm unhappy with the bailout of the financial industry, but as Cass says, it was the much lesser of two evils. The problem now is, everyone with a lobbyist is now moaning about how they must be bailed out as well or there will be Dire Consequences to the American Economy, and putting their hand out.

Rewarding bad decisions brings out the worst in humans. Once you demonstrate that you're willing to help one person, everyone comes running for that "free money".

Posted by: MikeD at November 19, 2008 10:29 AM

Well, that was what I was thinking. Why not let the market correct itself instead of tinkering with that which was working? After all, if we are talking about behaviors here, the reason the loans were made in the first place was to put people in *koff, koff* affordable housing. Since interest is 75% of the monthly payment, with PMI being another 10%, how affordable housing needs to be is really up to the institution. What I am seeing is the banks were going to rely on a bail-out no matter what, when they should have just said no.

While I agree that banking underpins the economy, I am also of the opinion that building a house of cards on fractional reserve lending as codified by the Federal Reserve Act is a recipe for disaster. It was one of the factors that led to the Depression.

There are other factors as well, but this is definitely a thought provoking post, Cassandra, so if you don't mind, I will be opening my mouth in order to learn.


Posted by: Cricket at November 19, 2008 10:36 AM

Second, management as is must go. New faces should be recruited from unrelated industries — from companies widely respected for excellence in marketing, innovation, creativity and labor relations.

Please name an American company that makes something (I'm talking a manufacturing company, not a services company) that qualifies as such.

Posted by: RonF at November 19, 2008 11:24 AM

RonF - GE is really the only one I can come up with, and their heavy industrial division is now only a small part of their business. And I'm not sure that GE could be considered excellent in marketing, creativity or labor relations, although I do think they are still fairly innovative. Boeing also has heavy industrial capacity, but I don't think it's a great model and actually has made some pretty poor choices recently in my opinion.

On the automakers, I agree completely - I really don't understand how if they are loosing money so badly that they are in danger of not making it through the year they expect to magically have a turn around and be able to pay back these loans? I mean, what are they proposing to change to magically make money again?

GM is ditching the gold-plated lifetime health care for their white-collar workers, what a betrayal! Why do the unions get a free pass? They have to be able to dump those costs, and as unfair as it is (and believe me I am totally aware that it stinks majorly for the people affected) it's the only way they will survive. The government let the steel industry fail and default on its promises to retirees (my FIL can tell you all about it), and I would argue that the steel mills were far more important to national security than the automakers are.

The unions however have a lot of influence and I really think that without their influence this would not be an issue at all.

Posted by: Lynn at November 19, 2008 12:19 PM

Amen, Lynn.

Posted by: Cricket at November 19, 2008 01:15 PM

Intel, Agilent, Hewlett-Packard, IBM, DuPont, Exxon-Mobil,...

I could go on, but there are numberous examples.

GM especially should go under. The need to go bankrupt and re-organize, because they really stink as they are presently constituted.

I read a good suggestion on the comments about this at the "Belmont Club" the other day; based on their low present market capitalization, the government should just buy out all the shares of GM and give them to the UAW and tell them "this is your problem now". Heh.

Posted by: Don Brouhaha at November 19, 2008 01:17 PM

How about in return for a generous bailout, GM provides every taxpayer a brand new SUV until the "loan" is paid off? It not only means that GM will work really hard to get that loan paid off, but it also gets rid of the backlog of guzzlers sitting out on the lots. Pretty good idea, eh?

Posted by: Deep Thimker at November 19, 2008 01:43 PM

Silence, rownfox!

For too long American capitalist pig-dogs have preyed on helpless workers.

Posted by: The One at November 19, 2008 03:39 PM

Werks fer me! Mah baby needs a car!

Posted by: Thelma Lou at November 19, 2008 03:40 PM

Many Americans believe in the Silver Bullet that will kill any evil. They insist it exists and a little more political thought will locate it.

Have you noticed how many TV shows now feature heroes with psychic powers or detectives who can solve every case using a forensic lab or the agonies of being rich, young, and beautiful in Beverly Hills?

They offer refuges in mysticism, authority, and escape. It is idiotic.

We have an auto industry that is broke. I don't blame any individual working there. But over forty years these companies have declined, not made needed changes, and are now caught in an extraordinary collapse of vehicles sales.

Rather than face the facts the people call for Magic. Give them 25, 50, or ??? billions until they feel better. Is that amount to be paid once or every year?

The bankruptcy laws, unemployment compensation, and numerous agencies exist for a reason. The reason is to deal with failed companies and people in need.

Use them!

And forget the mystical; bail-outs and government (sorta) running car companies.

Posted by: K at November 19, 2008 04:37 PM

A quick point I'd like to make about the difference between the monetary system and the auto industry is that the constitution explicitly gives the legislature the power to not only coin money, but to regulate its value.

The rationale behind bailing out the former is that it is really about regulating the value of the currency and not about saving any particular business. Now, whether you believe this is a different matter, but that would be the constitutional argument in favor of it.

The latter is only about bailing out particular businesses, something the constitution would not allow.

Posted by: Yu-Ain Gonnano at November 19, 2008 10:46 PM

You don't believe in the Silver Bullet! Oh. You did not just say that!

*wheeze wheeze*

Now, look what you've done....I'm so worked up, you've given me the *vapahs*.


If you'll s'cuse me, I gotta call up my gyrlz and vent They are not going to believe this.

Posted by: Princess Angelina Contessa Louisa Francesca Banana Fanna Bo Besca the Third -- but you can call me D at November 20, 2008 01:02 PM

I'm so worked up, you've given me the *vapahs*.

Go a bit lightah on the barley sawdah when you get hawm and that'll solve the problem.

Posted by: BillT at November 20, 2008 01:48 PM

Too much Southern accents will result in newborn kitties being executed. You don't want kittens to be killed, now, do ya?

Posted by: Ymarsakar at November 20, 2008 03:17 PM

We can't go back to barter as an economic system.

Why not? We can always do a Fallout 3 and make the DC area into "The DC Wasteland Area".

Posted by: Ymarsakar at November 20, 2008 04:09 PM

after I made my comment about the Right Brain test here, Link

Many many kittens died. Do you really want that to happen again, Bill and Princess?

Posted by: Ymarsakar at November 20, 2008 04:22 PM

Dry ice is kid stuff. This all is much more dramatic with liquid nitrogen. Of course, you have to work somewhere where you have access to liquid nitrogen.....but that's another story.

Posted by: Don Brouhaha at November 21, 2008 06:16 PM

Too much Southern accents will result in newborn kitties being executed.

Ya shud tuhn awun tha Yoo-Toobs ta tha Great White Nawuth mower, eh? It's all aboot the dry ice.


Posted by: BillT at November 22, 2008 01:26 AM